President Donald Trump has signaled his displeasure at aspirations expressed by Saudi Arabia at a recent OPEC meeting with respect to an extension in the current supply deal between OPEC and non-OPEC members for continued supply constraints with a view to higher prices.
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Saudi Arabia is rumored to be looking for prices in excess of $100 per barrel, partly to support the upcoming $2 trillion IPO of Saudi Aramco and partly to stem dwindling reserves caused by a haemorrhaging budget deficit.
According to The Telegraph, the kingdom’s massive foreign cash reserves have dwindled from a peak of $737 billion in 2014 to $488 billion today. Some oil experts think that break-even for Saudi Arabia is somewhere close to $85 a barrel.
President Trump’s comments caused a sharp retraction in oil prices, but it is not clear if the fall will be sustained.
The supply market remains constrained by the deteriorating situation in Venezuela, which has resulted in the country’s output falling to multi-decade lows, adding to lost production from Angola’s aging fields and temporary shutdowns in Algeria. OPEC’s coordinated 1.9 million barrels per day cutbacks have achieved a near 2% reduction in world output.
There is also the possibility, the paper says, of the reimposition of sanctions on Iran, which might keep another 500,000 barrels a day off world markets. Iran pumped about 4% of the world’s oil production in March.
On the demand side, growth in the first three months of 2018 is forecast to reach more than 2.5 million barrels a day, according to Goldman Sachs.
Yet, the 800-pound gorilla is the U.S. shale market, which is said to be near universally profitable above $60 barrel. Were prices to approach $100, the flood of new supply could be dramatic, particularly if the Trump administration’s threats of “consequences” meant some form of additional support for further exploration and production.
According to Reuters, U.S. rig count rose to 820 last week — the highest since March 2015 — and illustrative of a trend that could see the U.S. exceed Russia as the world’s largest producer this year. Currently, the U.S. is producing 10.54 million barrels compared to Russia’s 11 million.
The Saudis argue that higher prices are justified because even when approaching $100 a barrel, there was little evidence of demand destruction. That neatly ignores the massive transfer of wealth from consumers to producers that occurs at higher prices, and if higher prices are only achieved by artificially constraining supply rather than market forces, there is little justification for allowing that transfer to take place.
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In this, as in so much else, we may not have heard the last of President Trump’s tweets — but on this, at least, he will have consumers everywhere behind him.